Canada's housing bubble close to bursting: Capital Economics

Prices could fall 25% in the next three years

CALGARY — Canada’s housing bubble is now close to bursting as housing valuations have “lost touch with fundamentals” and household debt is at a record high, says a report by Capital Economics.

The report says it fears that house prices could fall by as much as 25 per cent over the next three years.

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“House prices have been growing rapidly for nearly a decade now and it has reached the point where housing is so overvalued relative to incomes that a downward correction seems unavoidable,” says Capital Economics.

“Relative to disposable income per capita, our calculations suggest that housing is around 25 per cent overvalued, which is approaching the level of excess that the U.S. market reached at its peak in 2006.”

The report says the downturn in the housing sector will severely constrain economic growth over the next couple of years as consumption expands at a more “muted” pace and housing investment “shrinks.”

“We also anticipate that the end of the housing boom will lead to a marked decline in housing-related activity and employment,” it says.

Capital Economics says signs of over-building are evident as unoccupied housing units are at historically high levels, similar to 1994-95 when housing construction was last mired in a slump.

“Another sign of over-building, or perhaps over-consumption, is the sharp increases in the home ownership rate over the last 10 years,” it says. “This run-up has coincided with a housing price boom fuelled by rising financial leverage.

“Our concern is that these excesses will eventually lead to a house price correction, which would greatly impact household wealth, consumer confidence and the economic recovery.”

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